French property market - boom or bust?

The ups and downs of the property market in France

What is on the horizon for French property prices?

The French property market seems to have bucked the trend in recent times, remaining not only buoyant through the difficult financial times, but even showing signs of strong growth in certain parts of the country. Although it has always seemed that French property trends do not show the same propensity as British and Spanish markets to go through periods of extreme boom and consequently bust, this month (July 2011) fears have been raised that this scenario may be on the horizon for France.

Prices rising in Paris and the Alps

Recent changes to interest rates and new tax breaks have incited, if not a buying frenzy in France, a marked upward trend in the property market. After falling in the economic crisis in 2009, prices have once again been rising, especially in Paris and the Alps, thanks to government incentives for house buyers introduced by Nicholas Sarkozy. Loans issued for property purchase have doubled since the end of 2010, bringing greater revenue into French banks, and the picture for France seems rosy... but is there a downside?

Is it sustainable?

It is the long term sustainability of this situation that is giving cause for concern. Should interest rates rise, as they seem likely to do, what will happen to the market? Will some lenders be found to have been tempted into offering unsustainable mortgages, only to face the same problem that Britain has seen in the last couple of years? Will homeowners be tempted into a selling frenzy, hoping to capitalise on the profit offered by rising prices? Much of Europe has seen the effects of an overheated property market, and there are some who say that any bubble must ultimately burst.

Warnings being given

The case for a possible boom to bust scenario is outlined by ratings agency Moody's Investors Services, who see the market becoming over excitable and the lending banks being at risk in the case of a sudden fall. Stephane Herndl, an analyst from Moody's, has said: "French banking groups inherent exposure to the country's housing market is the principal reason why a potential correction in house prices poses material credit risk." The French central bank also takes a gloomy viewpoint, stating that the high property prices seen at the moment could distort the economy, create social discontent and heighten inequality. Further comments, from the IMF, more cautiously warn that there is a possible danger of overvaluation of property due to the current situation.

Not all are predicting a bust

There are other voices, however, which stake a claim to be heard on the issue, downplaying the boom to bust theory. They state that risks to French banks are far less severe than in other countries due to the tight lending controls normally exerted. The French banks are, as a whole, not keen to take risky financial decisions, and mortgages are more difficult to obtain than has been the case in the past in Britain and the United States. Lending criteria are far tighter, and it seems unlikely that France will experience the same subprime scenario that decimated the USA market.

Realistically, what is likely to happen?

While it seems unlikely, given the above, that French property will dramatically move from boom to bust in the short or even long term, the advice, as in any uncertain times, is to approach borrowing with caution. This is a period of change and the current interest rate could well increase, but a gradual and moderate increase should not have a hugely detrimental effect on the market. This is more likely than a massive hike, and would result realistically in a slowdown of growth rather than an overnight fall. It seems on balance, that prices will probably slow and stabilise, representing a return to the more normal state of play in France.

Sound advice

As always, the best and only advice is not to borrow what you may not be able to afford in the event of rates rising, and not to overvalue property you are considering buying, nor your own property when it comes to selling. The French property market, within the bounds of reasonability, still seems likely to remain in a relatively stable position, but it pays to be aware of the warnings, however distant they may appear.

About the author

Joanna Simm moved to the Languedoc area of south-west France in October 2004 having found her property through French Property Links.

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